Obamacare’s Defenders Have No Idea What Insurance Is

The most telling reaction to Paul Ryan’s defense of the House GOP’s Obamacare replacement bill—I won’t call it a repeal, because it isn’t—is the way some mainstream media reporters seized on this section.

Ryan: The whole idea of Obamacare is…the people who are healthy pay for the…sick. It’s not working, & that’s why it’s in a death spiral pic.twitter.com/ztTXrn7bpH

Ryan’s explanation was boiled down to the following: “The whole idea of Obamacare is…the people who are healthy pay for the…sick. It’s not working, and that’s why it’s in a death spiral.”

Hint: when you see that many ellipses in a quote, it’s probably not an accurate representation of what was said. But what was telling was the reaction to what people thought Ryan said. They clucked and shook their heads and told us that this is just how insurance works—the healthy pay for the sick!—and Ryan must be an idiot for not knowing this. Which gets it exactly backwards.

“Insurance is a really problematic concept if you’re opposed to sharing.”

Appelbaum is a finance and economics reporter for the New York Times who has (irony alert) advocated improved “financial literacy.” So I’m going to go out on a limb and posit that he actually does know, somewhere deep down, what insurance is. He certainly ought to know. Yet you wouldn’t guess that from the simplistic, glassy-eyed way he invokes “sharing,” as if all he needs to know he learned in kindergarten and the fields of finance and economics didn’t exist.

This shouldn’t be too hard of a question: what is the difference between insurance and “sharing”? If somebody sold you insurance on the terms these media types are endorsing, by telling you that the whole system is set up so you’re likely to pay more than everybody else and get less in return, would you buy it? Don’t be silly, that’s a rhetorical question. Of course you wouldn’t buy it, which is why Obamacare had to impose a “mandate” to force you to buy it.

But this is not what insurance is actually supposed to be. It is not a mechanism for some kind of free-form social “sharing.” I can tell we’re going to have to get really basic here, because a lot of people are really determined not to understand how a very simple thing works. So let me explain it slowly and carefully.

The point of insurance is not that healthy people pay for sick people. The point of insurance is that you pay when you are healthy in order to reduce your own financial risk when you eventually become sick.

The ideal way to do this would be simply to save your own money, to put it aside while you are healthy so that you have a fund to draw on when you need medical treatment. This would work perfectly, if you knew exactly when you were going to need it and exactly how much it was going to cost. But there’s no way to know this, so everyone faces a risk. What if I become sick before I have enough money set aside? What if I get some sort of cancer that’s horrifically expensive to treat? Hence the need for insurance.

The point of health insurance is not to provide health care. The point is to hedge against financial risk. It is a form of finance. You still set aside a certain amount every month, as you do with savings, but you control for the short-term risk of needing your benefits before you have fully paid for them. Some people will pay premiums for only a few months before they need the benefits. Others will pay for decades without needing them. You accept this because you don’t know ahead of time which one of those people you are going to be.

But you can make calculations about which one of those people you are likely to be. So you want your premiums to be correlated to your own level of risk and not just be a slush fund to be “shared” with others, because that looks a whole lot like getting ripped off. If you find yourself required to pay extremely high premiums while you’re still young and healthy and with a healthy lifestyle, and therefore with a very low risk of using much of your coverage, then you may well decide you’re better off without insurance. The steep premiums you are paying are not justified by the relatively small amount of risk they defray. Even if there’s a penalty for failing to buy insurance, if the penalty is small enough—and Obamacare’s architects didn’t have the guts to make it as big as it really needed to be—then you’re going to decide you’re better off just paying the penalty.

Now add to this one other factor. If the whole system is designed to allow you to wait and get insurance later, when your risk of developing a serious health problem is much higher or even after you already have a chronic problem, and you can do that without paying much more, then your decision becomes even clearer. Of course you’re going to delay getting insurance. All of the economic incentives tell you this is the smart move.

The result is precisely the Obamacare “death spiral” Paul Ryan was explaining. The system is designed to overcharge the young and healthy in order to subsidize the insurance of the old and sick. In doing so, it creates a huge incentive for those young people to drop out and stop paying the subsidies and instead to wait until they’re older and sicker. So you end up with more people who need to be subsidized and fewer people to do the subsidizing. This is exactly what is happening on the Obamacare exchanges. That’s why a bunch of insurers decided they couldn’t break even and bailed out, and it’s why those who remained are charging ever-increasing premiums, making a joke out the name “Affordable Care Act.”

If you want a system that is actually based on involuntary “sharing,” on the outright redistribution of money from one group of people to another—well, there’s a name for that, but it’s not “insurance.” It’s “welfare.” Applied to health care, that system would be something like Medicaid—which turns out to be mostly what Obamacare accomplished: pushing a bunch of new people onto Medicaid and expanding the welfare state.

That’s what everybody on the left really wanted all along. They never wanted to expand private health insurance, which they have spent decades vilifying. Instead, they wanted health care to be a welfare state entitlement, which they call by the euphemism “single payer.” This has its own death spiral, by the way, which was memorably summed up by Margaret Thatcher when she said that the problem with socialism is that eventually you run out of other people’s money.

But the point is that the Democrats didn’t think they could get away with full socialized medicine politically—not yet, at least—so they settled on the bastardized compromise of Obamacare, which consists of trying to treat private insurance as if it were a welfare entitlement. It was an unsustainable pretense, and that’s what is currently collapsing.

All of this is such a big story that everybody knows what’s happening and why. But the mainstream reporters and commenters have an ideological bias against allowing any big government program to be rolled back, no matter how badly it fails. They have a more immediate partisan interest in thwarting anything Republicans are trying to do and trying to make them look foolish and needlessly cruel. So they play dumb. They pretend they don’t know anything about how insurance works or how Obamacare works—and then they try to deflect this induced ignorance by pretending that Paul Ryan is the dumb one.

That’s my theory, anyhow. You can decide for yourself whether this is more or less comforting than the alternative hypothesis, which is that the nation’s elite economics and health care reporters don’t know the basics of their own field of expertise.